Cost Accounting Master Budget and Responsibility Accounting by pjx11396

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									   Master Budget and
Responsibility Accounting




 Cost Accounting   Horngreen, Datar, Foster
             Budgeting Cycle

 Performance planning
 Providing a frame of reference
 Investigating variations
 Corrective action
 Planning again




Cost Accounting       Horngreen, Datar, Foster
              The Master Budget



          Master Budget
          Master Budget               based on one
                                      expected scenario


Operating
Operating              Financial
                       Financial
Decisions
Decisions              Decisions
                       Decisions


     Cost Accounting    Horngreen, Datar, Foster
                      Why Budgets?

Conveys strategy to employees and managers

Provides a framework for judging performance

Motivates employees and managers

Promotes coordination and communication




    Cost Accounting          Horngreen, Datar, Foster
     Strategy, Planning, and Budgets


                             Long-run                         Long-run
                             Planning                         Budgets
Strategy
Analysis
                             Short-run                        Short-run
                             Planning                         Budgets

           Cost Accounting         Horngreen, Datar, Foster
    Time Coverage of Budgets

Budgets typically have a set time period
(month, quarter, year).
This time period can itself be broken into sub-
periods.
The most frequently used budget period is one
year.
Businesses are increasingly using rolling
budgets.



     Cost Accounting     Horngreen, Datar, Foster
                          Operating Budget

                                         Materials
                                       Inventory B.
                                                               Procurement B.


                                                              Requirements
Sales Budget                       Production B.
                                                              Budget:
                                                              - Materials
Finished Goods                                                - Labor
 Inventory B.                                                 - Capacities



                   Revenue B.                                 Production Cost B.
                                                              -direct
                                   Non-Production             - overhead
                                      Cost B.

                 Cost Accounting               Horngreen, Datar, Foster
    Operating Budget Example

Hawaii Diving expects 1,100 units to be sold
during the month of August 2004.
Selling price is expected to be $240 per unit.
How much are budgeted revenues for the
month?
1,100 × $240 = $264,000




      Cost Accounting      Horngreen, Datar, Foster
         Operating Budget Example

Two pounds of direct materials are budgeted per unit at a
cost of $2.00 per pound, $4.00 per unit.
Three direct labor-hours are budgeted per unit at $7.00 per
hour, $21.00 per unit.
Variable overhead is budgeted at $8.00 per direct labor-
hour, $24.00 per unit.
Fixed overhead is budgeted at $5,400 per month.
Variable nonmanufacturing costs are expected to be $0.14
per revenue dollar.
Fixed nonmanufacturing costs are $7,800 per month.

           Cost Accounting     Horngreen, Datar, Foster
       Production Budget Example


                           Budgeted sales (units)
+   Target ending finished goods inventory (units)
–    Beginning finished goods inventory (units)

=                  Budgeted production (units)


         Cost Accounting             Horngreen, Datar, Foster
           Production Budget Example

Assume that target ending finished goods inventory is 80 units.
Beginning finished goods inventory is 100 units.
How many units need to be produced?

Units required for sales                                        1,100
Add ending inv. of finished units                                  80
Total finished units required                                   1,180
Less beg. inv. of finished units                                  100
Units to be produced                                            1,080




             Cost Accounting         Horngreen, Datar, Foster
       Direct Materials Usage Budget

Each finished unit requires 2 pounds of direct materials at a
cost of $2.00 per pound.
Desired ending inventory equals 15% of the materials
required to produce next month’s sales.
September sales are forecasted to be 1,600 units.
What is the ending inventory in August?
480 pounds




           Cost Accounting      Horngreen, Datar, Foster
       Direct Materials Usage Budget

September sales: 1,600 × 2 pounds per unit
    = 3,200 pounds
3,200 × 15% = 480 pounds (the desired ending inventory)
What is the beginning inventory in August?
1,100 units × 2 × 15% = 330 units
How many pounds are needed to produce 1,080 units in
August?
1,080 × 2 = 2,160 pounds




          Cost Accounting    Horngreen, Datar, Foster
         Material Purchases Budget

Hawaii Diving Direct Material Purchases Budget for the
Month of August 2004

  Units needed for production                             2,160
  Target ending inventory                                   480
  Total material to provide for                           2,640
  Less beginning inventory                                  330
  Units to be purchased                                   2,310
  Unit purchase price                                    $ 2.00
  Total purchase cost                                    $4,620
          Cost Accounting     Horngreen, Datar, Foster
   Direct Manufacturing Labor Budget

Each unit requires 3 direct labor-hours at $7.00 per hour.
Hawaii Diving Direct Labor Budget for the Month of August
2004

   Units produced:                                          1,080
   Direct labor-hours/unit                                      3
   Total direct labor-hours:                                3,240
   Total budget at $7.00/hour:                            $22,680


          Cost Accounting      Horngreen, Datar, Foster
      Manufacturing Overhead Budget

Variable overhead is budgeted at $8.00 per direct labor-
hour.
Fixed overhead is budgeted at $5,400 per month.
Hawaii Diving Manufacturing Overhead Budget for the
Month of August 2004:


  Variable Overhead: (3,240 × $8.00) $25,920
  Fixed Overhead                       5,400
  Total                              $31,320

           Cost Accounting     Horngreen, Datar, Foster
             Ending Inventory Budget

Cost per finished unit:
•   Materials                                                    $ 4
•   Labor                                                         21
•   Variable manufacturing overhead                               24
•    Fixed manufacturing overhead                                  5*
•   Total                                                        $54
             » *$5,400 ÷ 1,080 = $5

What is the cost of the target ending inventory for materials?
• 480 × $2 = $960
What is the cost of the target finished goods inventory?
• 80 × $54 = $4,320


             Cost Accounting          Horngreen, Datar, Foster
           Cost of Goods Sold Budget

•   Direct materials used   2,160 × $2.00                      4,320
•   Direct labor                                              22,680
•   Total overhead                                            31,320
•   Cost of goods manufactured                                $58,320


Assume that the beginning finished goods inventory is
$5,400.
Ending finished goods inventory is $4,320.
What is the cost of goods sold?



            Cost Accounting        Horngreen, Datar, Foster
       Cost of Goods Sold Budget


Beginning finished goods inventory                   $ 5,400
+ Cost of goods manufactured                         $58,320
= Goods available for sale                           $63,720
– Ending finished goods inventory                    $ 4,320
= Cost of goods sold                                 $59,400



        Cost Accounting   Horngreen, Datar, Foster
     Nonmanufacturing Costs Budget

Hawaii Diving Other Expenses Budget for the Month of
August 2004


 Variable Expenses:         ($0.14 × $264,000)             $36,960
 Fixed expenses                                              7,800
 Total                                                     $44,760




          Cost Accounting       Horngreen, Datar, Foster
         Cost of Goods Sold Budget
Hawaii Diving has budgeted sales of $264,000 for the month
of August.
Cost of goods sold are budgeted at $59,400.
What is the budgeted gross margin?
Hawaii Diving Budgeted Income Statement for the Month
ending August 31, 2004
 Sales                      $264,000                     100%
 Less cost of sales          59,400                       22%
 Gross margin               $204,600                      78%
 Other expenses                44,760                     17%
 Operating income           $159,840                      61%

          Cost Accounting     Horngreen, Datar, Foster
    Financial Planning Models


     Financial planning models are
  mathematical representations of the
  interrelationships among operating
activities, financial activities, and other
 factors that affect the master budget.



     Cost Accounting    Horngreen, Datar, Foster
         Example: Cash Budget

Depends on collection pattern:

In the month of sale:                                50%
In the month following sale:                         27%
In the second month following sale:                  20%
Uncollectible:                                        3%




      Cost Accounting     Horngreen, Datar, Foster
                        Cash Budget

Budgeted charge sales are as follows:

•   June                                    $200,000
•   July                                    $250,000
•   August                                  $264,000
•   September                               $260,000



What are the expected cash collections in August?



      Cost Accounting          Horngreen, Datar, Foster
                            Cash Budget

Budgeted Cash Receipts

for the Month Ending August 31, 2004

August sales:           $264,000 × 50%                        $132,000
July sales:             $250,000 × 27%                         $67,500
June sales:             $200,000 × 20%                         $40,000

Total                                                         $239,500


          Cost Accounting          Horngreen, Datar, Foster
                            Cash Budget

Budgeted Cash Disbursements

for the Month Ending August 31, 2004
August purchases                                              $ 4,620
Direct labor                                                  $22,680
Total overhead                                                $31,320
Other expenses                                                $9,760*
Total                                                         $68,380

    *Other expenses exclude depreciation


          Cost Accounting          Horngreen, Datar, Foster
                        Cash Budget


              Cash Budget
  for the Month Ending August 31, 2004

Budgeted receipts                                         $239,500
Budgeted disbursements                                      68,380
Net increase in cash                                      $171,120


      Cost Accounting          Horngreen, Datar, Foster
    Exercise: Prepare a purchases budget in pounds for July, August, and
September, and give total purchases in both pounds and dollars for each month.


 Lubriderm Corporation has the following budgeted sales for the next six-month
 period:
                   Month         Unit Sales
                   June          90,000
                   July          120,000
                   August        210,000
                   September     150,000
                   October       180,000
                   November      120,000

 There were 30,000 units of finished goods in inventory at the beginning of June.
 Plans are to have an inventory of finished products that equal 20% of the unit
 sales for the next month.
 Five pounds of materials are required for each unit produced. Each pound of
 material costs $8. Inventory levels for materials are equal to 30% of the needs
 for the next month. Materials inventory on June 1 was 15,000 pounds



               Cost Accounting                Horngreen, Datar, Foster
                   What is Kaizen?


The Japanese use the term “kaizen” for continuous
improvement.
Kaizen budgeting is an approach that explicitly
incorporates continuous improvement during the
budget period into the budget numbers.




      Cost Accounting       Horngreen, Datar, Foster
               Kaizen Budgeting

 A kaizen budgeting approach would
  incorporate future improvements.

        Budgeted Hours/Item
January – March 2004                               3.00
April – June 2004                                  2.95
July – September 2004                              2.90
October – December 2004                            2.85
    Cost Accounting     Horngreen, Datar, Foster
       Activity-Based Budgeting


Activity-based costing reports and analyzes
          past and current costs.

  Activity-based budgeting (ABB) focuses
on the budgeted cost of activities necessary
 to produce and sell products and services.


       Cost Accounting   Horngreen, Datar, Foster
             Activity-Based Budgeting

                                    Product A       Product B
Units produced:                           880            200
Labor-hours per unit:                        3             3
Budgeted setup-hours:                        5             5
Total budgeted machine setup related cost is $25,920 per month.

Total budgeted labor-hours are:
Product A: 880 × 3                                   2,640
Product B: 200 × 3                                     600
Total                                                3,240
What is the allocation rate per labor-hour?
 • $25,920 ÷ 3,240 = $8.00



             Cost Accounting          Horngreen, Datar, Foster
          Activity-Based Budgeting

Total cost allocated to each product line:
Product A: $8.00 × 2,640        =       $21,120
Product B: $8.00 × 600          =       $ 4,800

Under ABB, the number of setups is the cost driver.
$25,920 budgeted machine setup cost
÷ 10 budgeted machine setup-hours
= $2,592 allocation rate per machine setup-hour.
How much machine setup related costs are allocated to
each product line?

           Cost Accounting     Horngreen, Datar, Foster
  Activity-Based Budgeting


   Product A          Product B
  $12,960             $12,960
  $2,592 × 5          $2,592 × 5

   Setup-related cost per unit:
Product A: $12,960 ÷ 880 $14.73
Product B: $12,960 ÷ 200 $64.80

  Cost Accounting   Horngreen, Datar, Foster
What is a Responsibility Center?


 It is any part, segment, or subunit
  of a business that needs control.

               – production
               – service



   Cost Accounting        Horngreen, Datar, Foster
      Types of Responsibility Centers

Cost Center
Profit Center
Investment Center




          Cost Accounting   Horngreen, Datar, Foster
         What is Controllability?


It is the degree of influence that a specific
     manager has over costs, revenues,
          or other items in question.

  A controllable cost is any cost that is
  primarily subject to the influence of a
   given responsibility center manager
         for a given time period.
       Cost Accounting   Horngreen, Datar, Foster
                             Controllability


      Responsibility accounting focuses on
    information and knowledge, not control.

    A responsibility accounting system could
      exclude all uncontrollable costs from
        a manager’s performance report.

In practice, controllability is difficult to pinpoint.

           Cost Accounting            Horngreen, Datar, Foster
        Human aspects of Budgeting

Budgeting should not be considered as a „mechanical tool“
Quality of the budget depends on the information that is fed
into the process
There are incentives for dishonest reports
• Budgetary slack
• Empire building
Management aims to ensure honest reporting by lower level
management
• Via appropriate performance measures
• Monitoring


           Cost Accounting       Horngreen, Datar, Foster
                         True or False ???

A budget that covers the financial aspects is a qualitative expression of
a proposed plan of action by management for a specified period.

The master budget reflects the impact of only operating decisions.

Feedback in the budgeting process may cause a firm to alter its
strategies and plans.

Statistical analysis should be the only input used to forecast sales.

Sensitivity analysis allows managers to see how results will change if
predicted data are not achieved or an underlying assumption changes.


             Cost Accounting           Horngreen, Datar, Foster
                       Pick your Choice I:

When a budget is administered wisely, it will
 • discourage strategic planning.
 • provide a framework for performance evaluation.
 • discourage managers and employees.
 • eliminate coordination and communication between subunits.

If a firm is using activity-based budgeting, the firm would use this in
place of which of the following budgets?
 •   Direct materials budget
 •   Revenue budget
 •   Direct labor budget
 •   Manufacturing overhead budget



              Cost Accounting          Horngreen, Datar, Foster
                     Pick your Choice II:

BDH Corporation, which makes only one product, Kisty, has the
following information available for the coming year. BDH expects sales
to be 30,000 units at $50 per unit. The current inventory of Kisty is 3,000
units. BDH wants an ending inventory of 3,500 units. Each unit of Kisty
takes two units of component L. Component L is budgeted to cost $12
per unit. Current inventory of L is 4,000 units. BDH wants 6,000 units of
L on hand at the end of the next year. How much will the direct materials
budget show as the cost of materials to be purchased?

 • $330,000
 • $390,000
 • $684,000
 • $756,000


              Cost Accounting         Horngreen, Datar, Foster
                Who Gets the Money?
             New York Post, April 29, 2001

In the above-cited article, ABC and its parent company, Walt Disney Company,
say that the show "Who Wants to be a Millionaire," is the most profitable
television show ever - generating almost $1 billion in revenue in a little less than
two years on the air.
Each individual show costs about $700,000 to produce, including prize money
and host Regis Philbin's salary. Each show earns $2 million in advertising
revenue. The rights to air Millionaire are also sold to Canada for $250,000 per
episode.
The Millionaire show also sells a CD-ROM game for $20. About 4 million of
these games have been sold.
There is also an on-line version of the game that Millionaire fans can play. Users
of the game don't pay, but each "hit" is noted when advertising space is sold for
the site.
The article also points out that Disney also sells hats and t-shirts of the game,
and markets a special version of "Millionaire" to corporations that can be played
at conventions by employees and clients.

               Cost Accounting             Horngreen, Datar, Foster
         “Who Gets the Money?“ - Questions

1. The Millionaire show itself generates about $1.3 million per episode in
   net income ($2 million in revenue, $700,000 in expenses.) Give a
   reason why this should be considered a profit center for evaluating a
   manager's performance.

2. Do you think that one manager has responsibility for the Millionaire
   show, as a profit center, or is it divided as a cost center and as a
   revenue center?

3. Should the ancillaries of the show (the t-shirts, CD-ROM, etc.) be
   evaluated as a profit center, cost center or revenue center? Why?




                Cost Accounting         Horngreen, Datar, Foster

								
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